Saturday, February 25, 2017

The case for simplicity and the dangers of trying to improve


"Everything should be made as simple as possible, but not simpler."

The above quote is attributed to Albert Einstein, and it is something I try to adhere to with my own trading. That said, there is a balancing act between keeping things as simple as possible, against striving for improvement which may mean adding complexity to what you are doing.

In this post I referred to drawdowns, and the graphs show the significant drawdown of 30% that I suffered in the second half of 2014. While it can be said that this was partly due to the prevailing conditions at the time, this also directly coincided with adding some layers of complexity to my own trading rules. 

In response to this, I resolved to remove one such layer of complexity, which related to looking at the the movements in the indices to determine my trading bias, and to aid possibly with the timing of increasing or decreasing my exposure (refer to this for more).

Eliminating that level of complexity helped me recover relatively quickly and make new equity highs.

Looking back at the returns generated in from July 2012 through to the summer of 2014, you may wonder why I changed what I was doing - if it wasn't broke, why would I think about fixing it? 

It's a good question. The only thing I can say is that this was part of an attempted process to try and further improve - by attempting to factor in an additional layer of complexity that had been used by other successful traders for many years. Subsequent results showed that it didn't work - for me and my own method. But that's not to say that it won't work for you. That is trading!

When I again reviewed my trading results towards the end of 2016, the need to eliminate further levels of complexity was again one of the conclusions reached - in particular how I try and identify potential opportunities or setups. Therefore, I have been going through a similar process.

In effect, I am reverting back towards the level of complexity I was using when I made the bigger returns and lower drawdowns.

Recently I've watched a couple of podcasts from traders I follow and respect, and who like to follow price and its trends on stocks - John Boorman (@jboorman) and Larry Tentarelli (@LMT978). One common element to both of them was that, as they developed and refined their own methods, they stripped away a lot of the indicators and other factors deemed to be superficial, to end up with a very streamlined, efficient, simple method that worked for them.

With my own trading, time (and the subsequent results generated) will tell if this simplification process was the right thing to do, but the initial results, together with the open profits on my current positions, give me confidence that this drive back towards simplicity is helping me move forwards.

To finish, here is a short extract from Michael Covel's Trend Following which neatly summarises the above thoughts:

"Charles Faulkner quotes Ed Seykota as saying "I've made phenomenal amounts of money for very simple decisions but I was willing to make them. Somebody had to." Faulkner then comments, "Others are looking for highly complex ways of interacting with the markets, when most of the time it's only the simple ones that are going to work.""

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